Kraft spinoff adds to challenges: analysts

DanBurrows

NEW YORK (MarketWatch) -- Altria Group Inc.'s long-awaited spinoff of Kraft Foods Inc. will likely be a mixed blessing for the packaged-food giant's shareholders, analysts said, as increased independence will come at the price of a massive dump of equity on the market and higher administrative costs.

Altria
MO, -1.12%
said it will spin off its 88.6% stake in Kraft
KFT
on March 30 to Altria shareholders as of March 16. Altria will distribute about 0.7 a share of Kraft for every share of Altria common stock as of the record date, based on the number of Altria shares outstanding on that date. See full story.

In addition, Louis Camilleri will step down as chairman of Northfield, Ill.-based Kraft following the spinoff, with Chief Executive Irene Rosenfeld taking on that additional role, the company said.

Separately Wednesday, Kraft said fourth-quarter income fell 19%, hurt by charges, divestitures, market-share losses in key brands and one fewer week in 2006. See full story.

Altria first began floating the idea of spinning the rest of Kraft off two years ago, but it's been awaiting the resolution of tobacco litigation to formalize the plan. Among other things, the spinoff will enhance Kraft's ability to make acquisitions, improve its ability to recruit and retain executives, and provide a greater capacity to take on debt, Altria said Wednesday.

But package-food analysts said the move also adds to Kraft's many challenges.

Good for one, not for the other

"We continue to view the spinoff of Kraft as a wonderful thing for Altria shareholders but an extremely disruptive event for Kraft shareholders," wrote D.A. Davidson & Co. analyst Timothy Ramey in a research note.

The analyst said that the more than $50 billion of Kraft equity will need to find a home all at once, likely causing an extended oversupply of the company's shares.

"It is such a huge amount of equity, equal to about 40% of all the market capitalization of slow-growth large-capitalization food companies currently owned by institutions and investors," Ramey added.

For his part, Prudential analyst John McMillin pointed to incremental and ongoing costs of being a company totally independent of Altria.

"These costs include taxes and shared services, as Altria has been providing some of Kraft's information-technology needs," the analyst wrote. "We guess these incremental costs, which are likely to continue for years, may total 10 cents to 15 cents a share."

More optimistically, the spinoff and leadership of the new CEO -- Rosenfeld came on board in late June -- afford Kraft the opportunity to turn around what's long been a sluggish business, said Wachovia Securities analyst Jonathan Feeney.

"In many ways, we believe Kraft has been permitted to fall into a 'sleepy giant' status since being acquired by Altria in 1988," Feeney wrote.

Kraft needs to address a number of pervasive headwinds, Feeney said, including underinvestment in core brands, a lack of a coherent international strategy and product innovations that have been too late, narrow or off the mark.

"As such, we see the June 2006 appointment of new CEO and Kraft veteran Irene Rosenfeld as the likely opening of a new chapter in the company's history," Feeney added.

The spinoff also frees up Kraft to pare its portfolio more aggressively. The company has been shedding businesses to focus on core categories such as biscuits, cheese, coffee and refrigerated beverages.

Driscoll said the businesses, contributing about $6.4 billion, or 18%, of total revenue, could fetch as much as $12.5 billion aftertax.

"We note that these businesses constitute the bulk of the convenient meals and grocery businesses, which are not only outside of the company's global core categories but which are also a varied mix of businesses themselves," the analyst wrote in a research note.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.